How to underwrite a mortgage
Why are things so difficult for no credit score borrowers?
Here's a quick summary.
In 2007 a financial crisis plagued the United States and became a worldwide issue. Much of this crisis was due to the issuance of "risky" mortgage products that not only stopped the flow of capital into the mortgage bond funds, it created a domino effect in the economy that led to skyrocketing unemployment. Unemployment led to widespread mortgage defaults, and led to massive foreclosures on the books of most all mortgage servicers in the U.S. This led to the elimination of the subprime mortgage market, and caused all mortgage guidelines to be systematically tightened through the years.
There are 3 major government entities that set the guidelines for about 85% or more of all the mortgage loans originated in the U.S. Those agencies are the FHA. Fannie Mae. and Freddie Mac .
When these three agencies performed an audit on their defaulted loan portfolios, they all found an unusually high amount of those defaults came from borrowers that had qualified using "alternative credit sources," which is the term we use for no credit score or insufficient credit on the credit report. This led them to take action and start tightening their guidelines for those that have no credit scores or have insufficient credit reporting. The servicers that have to collect the payments for these loans have gone even farther by adding additional requirements, and the majority of Conventional mortgage servicers will not underwrite a loan with no credit score at all.
Dave Ramsey's Plan
Dave Ramsey listeners will know that Dave has not had a credit score for a very long time and is doing just fine. Dave's plan of getting out of debt works and we fully agree with his methods. However, the regulations described above have put people who are doing the right thing by getting out of debt into a difficult situation.
At Churchill, we understand this dilemma and will work hard to make sure responsible people are not penalized due to circumstances outside of their control. Below you will find how to best prepare for a mortgage if you do not have a credit score.
If I have a credit score, how can my credit be "insufficient?"
Let's say you have a credit card that has been open for 11 months and reports to all three credit bureaus. Your mortgage credit score is 721, and you have never made a late payment. According to the guidelines, you have insufficient credit history, because there is only a credit history of 11 months on one "minor" form of credit. Most underwriting guidelines are going to require at least 4 credit tradelines that have been open for 12 months or more that are paid as agreed (on time). Therefore, you will be required to come up with similar documentation needed when you have a 0 credit score.
What will I need to get qualified if I have insufficient credit or no credit score?
Most lenders are requiring 4 alternative credit tradelines with a 12 month payment history from the creditor stating "paid as agreed." Some go even further by requiring the creditor to list each payment, when it was received, and a signature from the representative for the creditor. (Alternative credit can be items such as cell phone bills, utility bills, insurance that is paid monthly or quarterly but not payroll deducted, or rent payments).
In mid-year of 2010, most lenders further tightened their guidelines by requiring one of the four alternative tradelines to be what is called a "Tier 1" tradeline, or housing payments such as rent or lease payments made by the borrowers. FHA now requires a 24-month history of Tier 1 payments as well as many Conventional lenders, but there are still a few Conventional lenders accepting a 12-month history.
For this reason if you are living rent-free, things are much more difficult.
Longer to underwrite
No credit score loans require an underwriter to scour every piece of documentation in the file from your paystubs and W2s to the 24 pages of the appraisal to make sure the risks have all been identified. That takes time - about 3 times as long as a normal borrower file. Don't look for quick answers, because the quick answer is easy - no. We want
to give that underwriter time to be familiar with all the aspects of your loan file so they can give the approval with confidence. This may even require additional documentation that doesn't seem to make sense to most of us. But let's remember the goal; give the underwriter what they need to feel comfortable with the risks on the loan to issue an approval. From the time the underwriter receives the file, I would give them at least 2 weeks to underwrite it. That probably takes a normal 30 day loan process up to about 45 days. Therefore, keep this in mind when writing a contract closing date.
Best chance - 15 year fixed rate with 20% down
If you have no credit score and do not have 20% down, it will be more difficult. Without 20% down, you will need mortgage insurance to cover the remainder of the loan financed. It is not uncommon for the loan to be approved by the investor then turned down by the mortgage insurance company. That means the deal is dead - end of story. We have found the loan that has the best chance for approval is one that is on a 15 year fixed rate and the borrower has 20% down. This eliminates the need for the mortgage insurance, and presents a lower risk to the loan servicer.
The few lenders that will still do these loans can decide to stop taking these loans at any time - even when the loan is in underwriting - and leave the borrower with no other option. Sound scary and unpredictable? It can be. That is why we want to fully inform you of the risks involved so those that have no credit score and start the loan process can know in advance how unpredictable this loan process can be. We don't advise customers to sign sales contracts for a purchase without some strong protective contingencies to cover you in the contract. One obvious protection would be to make the sale contingent upon the borrower being fully approved, otherwise all earnest money can be returned to the buyer. Stay away from any 100% commitments until you know your loan has been "cleared to close" and there are absolutely no other conditions needed.
How to prepareHere is what you need to do if you have no credit score but wish to purchase a home:
- Make sure you have 4 alternative credit tradelines, with one of them being a rent or lease payment. Contact the creditors and get a letter from each of them on their letterhead showing your name and account number, and stating your account has been "paid as agreed for the last 12 months." This is a good start, but further documentation could be required from the creditor.
- Try to have a full 20% down payment. **
- Get Preapproved long before you start looking for a home. You don't want to get your hopes up and get emotionally attached to the home of your dreams, only to wait 45 days and find out you cannot get approved.
In summary, no credit score loans are harder to document, harder to find lenders that will underwrite them, take longer to underwrite, may require a significant down payment, and require you to take precautions in the event the program is no longer available.
With all that said, we still close no credit score loans at Churchill Mortgage.
We just want to make sure our customers have the correct expectations and knowledge of the process going into the loan so they can properly prepare and protect themselves accordingly.
** for a 15 year loan, a $100,000 mortgage loan with a rate of 5.00% (APR 5.266%) and a 20% down payment ($25,000) on a purchase price of $125,000 would have a monthly payment of $790.78.*
Important Notices. The interest rates, annual percentage rates (APRs), discount points and rebates shown are subject to change without notice. The monthly payment amount shown includes principal, interest and mortgage insurance only. Your actual monthly payment will be higher if an escrow/impound account is established or required. Your APR will vary based on your final loan amount and finance charges. Stated rates and terms intended as examples only. Call (615) 370-8888 for current rates and terms.Source: www.churchillmortgage.com